FHA Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. At closing, a portion of the loan proceeds is used to pay the seller, or if a refinance transaction funds are used to pay off the existing mortgage lien. The remaining funds are placed in an escrow account and released as rehabilitation is completed. These progress payments are reimbursements for work that has been completed.
The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110% of the appraised value of the property after rehabilitation, whichever is less.
Many of the benefits that make FHA’s basic single family mortgage insurance product (Section 203(b)) relatively convenient for borrowers apply here. Some lenders charge additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee due to the extra processing work required. Banc Home Loans does not charge these fees.
203k Loan Eligibility:
All persons who can make the monthly mortgage payments are eligible to apply. Cooperative units are not eligible; individual condominium units may be insured if they are in projects that have been approved by FHA or the Department of Veterans Affairs, or meet certain Fannie Mae guidelines.
Eligible 203k Improvements:
The extent of the rehabilitation covered by Section 203(k) FHA insured loan may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation are eligible, provided that the existing foundation system remains in place. Section 203(k) FHA insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses. They can also cover the conversion of a property of any size to a one-to four unit structure.
The types of improvements that the borrowers may make using Section 203(k) financing include:
- structural alterations and reconstruction
- modernization and improvements to the home’s function
- elimination of health and safety hazards
- changes that improve appearance and eliminate obsolescence
- reconditioning or replacing plumbing; installing a well and/or septic system
- adding or replacing roofing, gutters, and downspouts
- adding or replacing floors and/or floor treatments
- major landscape work and site improvements
- enhancing accessibility for a disabled person
- making energy conservation improvements
An FHA 203k Standard loan is especially useful for borrowers looking to purchase or refinancing a home needing repairs, updates or has expansion potential and do not have the cash on hand to complete the renovation.